naked capitalism

Anonymous says:

A minor quibble. It’s “Sword of Greenbergclese”.

Richard Kline says:

The source of your perplexity, Yves, is that you anticipate logic where there is none. What we have here is stinking desperation and delusion. This 'potential loan' is not too different from the Moloch of the Super SIV Paulson tried to foist on the market. It is clear than Hank & Co. so dearly believe in the magic of the [shadow] banking system that to them no scheme, no matter how large or nonsensical, is too large to be 'funded' if put to the market with the US public authorities behind it. If JPM and GS are 'authorizied' to canvass the world for ~$70B in dough to throw on the building blaze in the gunpowder factory which is AIG, I doubt anyone thinks a tenth of that would actually be raised—but the idea is so spin the markets for a day or two until the raters can be bamboozled to back off 'for the good of the System,' or some such rot. This isn't a solution, it's a press release in search of the rube-ocracy.

Allowing AIG to gut its subsidiaries of capital is the move which boggles _my_ mind. I'm not exactly blaming Patterson and Dinallo, they are out of rabbits, hats, and magic bullets, but this move amounts to AIG not only eating its seed corn but cannibalizing its children. Ugley. I mean, evidently they are swapping 'collateral' down for that cash, i.e. ASBs and CDSs, which in this environment amounts to fraudulent conveyance. Anybody with the slightest exposure to those subsidiaries had better crawl under their thermal blanket and breath shallowly, 'cause no one should think the public authorities will make said exposees whole in a few months or weeks time. Man, this is a wild one.

. . . Watching this, I get the sense of a financial equivalent to Poland having fallen, Finland and Albania under invasion, Czechoslovakia long gone, China being wolfed down, and the fools in Britain and France who lost the Great War for themselves wandering around in Flanders looking for the foe and telling us they have things in hand just trust in them and their defences. The Big One ain't hit, yet.

matt says:

You are right, Yves. It makes no sense… unless the Fed decides to make another monster non-recourse loan. Forget coupon passes; non-recourse loans are the new printing press

Cheers, Matt

mmckinl says:

This is vintage Paulson. Kick the can down the road. We have seen this act too many times. The Super SIV, Hope(less) Now, Re-regulation and more. Who at this point, does Goldman call for capital to loan ?

I totally agree with Richard Kline’s post.

It was totally irresponsible for New York to give AIG access to secured assets from their subsidiaries.

When AIG goes, and it will, the fallout will be a disaster.

Steve says:

The theory is that finding secured lenders would demonstrate confidence in the valuation of the assets that AIG is putting up for sale. The reality is probably far worse. The question is how much un-rollable paper AIG has falling due in 30 – 60.

Francois says:

“All facts here are symptomatic of the EXTREMELY desperate straits of AIG.”

Are they really that desperate? Why did they refused a participation offer from a private equity firm this week end then?

Because the upper crust would’ve lost control of their Empire, correct?

So, in order to preserve their almighty self-importance in the food chain of the elite, they go and beg to the Fed.

Well…nyet!

They screwed up, it’s time to pay the piper.

The big boys go, or AIG blow…it’s that simple.

bondinvestor says:

the following are some personal speculations, based on my interpretation of the events so far. but, as i see it, it's the most logical reading of the facts on the ground as we know them.

the bridge loan only makes sense if AIG is going to be broken up and wound down in an orderly fashion.

think of it as DIP financing. the underlying insurance subs are going to be auctioned off in order to raise cash for holdco. holdco needs cash in order to (a) pay off the obligations of AIGFP; and (b) post collateral as the book is wound down. (AIGFP is an obligation of the holding company, i believe).

the global banks actually will be receptive to putting in $75B because the alternative is much, much worse: the wholesale unwinding of the CDS market. AIG was a big writer of protection, and probably didn't do much hedging. (as an insurance company, they are a natural seller of protection, and likely don't run a matched book the way JPM, GS and the market makers do.) the entire WORLD is long AIG counterparty risk via AIGFP. that includes the feds, via the interest rate swaps FNM/FRE have taken out to fix the duration of their retained portfolios.

AIG clearly has massive needs at holdco (ie, AIGFP). i suspect something more is going on than the well-known CDO exposures. i wouldn't be surprised if AIGFP was a big writer of FNM/FRE CDS, and LEH CDS. those two trades alone might have been enough to blow a $20-40B hole in their balance sheet (let's not forget that AIG started cratering just after paulson nationalized the GSE's. presumably the brokers who bought protection to offset their customer liabilities know who is on the hook for the claims payment.)

so let's suppose FM/FN blew another hole in AIG's balance sheet. then LEH starts tottering (another potential liability). the rating agencies are aware of this, and put the screws to the company to raise equity quickly. the street sniffs blood and the thing starts to unwind.

so AIG goes into the weekend looking for a miracle. Flowers passed. TPG passed. Buffett passed. those guys took a look and said "no thanks". we're more than happy to acquire some of your subs, but we're not injecting money into holdco (ie, AIGFP).

AIG then decides that their only hope is to approach the feds and threaten the system. the feds say, no way, and tell JPM & GS (two large CDS brokers) to deal with it themselves.

so JPM & GS are underwriting the DIP loan for the holdco. sure, the capital may avert a ratings downgrade in the near-term, but the reality is that no bank is putting in money unless they get paid back pretty quickly. the only way that happens is if the loan is secured by subsidiaries that are already on the market.

in the meantime, the market gets 6-12 months to gradually work down its exposure to AIGFP, in the hopes of averting another catastrophic hit on the heels of LEH.

what a massive failure of leadership, prudent risk management and regulation. unbelievable.